Doing Business In Japan

(For readers for whom Japanese is easier than English / 日本語が読みやすい方：上杉周作さんが本投稿を日本語に翻訳してくださいました。ビジネス・イン・ジャパンをご参照ください。)

I’ve been in Japan for ten years now and often get asked about how business works here, sometimes by folks in the industry wondering about the Japanese startup culture, sometimes by folks wishing to sell their software in Japan, and sometimes by folks who are just curious. Keith and I have discussed this on the podcast before, but I thought I’d write a bit about my take on it.

Disclaimer: Some of this is going to be colored by my own experiences.

The brief version: white male American (which occasionally matters — see below), came to Japan right out of college in 2004. I have spent my entire professional life here. I’ve worked in two traditionally-managed Japanese organizations (one governmental body and one megacorp), run my own business full-time since 2010, and have modest professional experience with Japanese startups (both run by Japanese folks and by foreigners).

I’m fluent in Japanese to all practical purposes.

Disclaimer the second: I’m going to attempt to avoid essentializing Japan too much, as (like the US) it is a big country with a broad range of human experience in it. Essentialization is a persistent problem with most writing about foreign cultures. The best antidote for it ever with regards to Japan is an out-of-print book Making Common Sense of Japan.

That said, there may be some generalization and/or exaggeration for dramatic effect. Mea maxima culpa.

The Company Is Father. The Company Is Mother.

The slice of contemporary Japanese life of keenest interest to you is dominated by one particular relationship: that of the Japanese salaryman to his employer. If you understand this relationship, it is almost a Rosetta stone. You’ll immediately be able to predict true things about the world like “Japanese startups probably have huge difficulties in hiring.” (About which, more later.)

A salaryman (transliterated from the Japanese which is itself borrowed from English), more formally a “full-time company employee” (正社員), is the local equivalent of a W-2 employee in America. This is roughly 1/3rd of the labor force in Japan, but it has outsized societal impact.

Traditionally, salarymen (and they are, by the way, mostly men) are hired into a particular company late in university and stay at that company or its affiliates until they retire.

There are other workers at Japanese companies — contract employees, who can be (and are) let go at will, or young ladies on the “pink collar” track who are encouraged tacitly or explicitly to quit to get married or raise children — but the salaryman/employer relationship is the beating heart of the high-productivity Japanese private sector. (The Japanese economy is roughly 1/3rd the public sector, 1/3rd low-productivity firms like restaurants or traditional craftsmen, and 1/3rd high-productivity household-name megacorps. Salarymen are mostly present in the last one, which happens to dovetail with your professional interests.)

The salaryman/employer relationship is best characterized as “You swear yourself to us, body and soul, and in return we will isolate you from all risks.”

The employee hereby promises the company: Your first obligation, in all things, will be to your company. You will work incredibly hard (90+ hour weeks barely even occasion comment) on their behalf. The company can ask you to head to a foreign office for three years without your wife and child beginning tomorrow, and you will be expected to say “Sure thing, when does my flight leave?” or accept that your career advancement is functionally over.

The company will mold you to their exacting specifications to do whatever form of service they require. You will happily comply, in this as in all things. For example, if your company needs a Java-speaking systems engineer and you have a degree in Art History, this is not a problem because you can be fixed. Sure it might take ten years and only work on a quarter of the new hires but that’s why we employ you for 45 years and hire a hundred at once! (What of the Art History majors who don’t successfully learn how to edit XML files or architect web applications? Well, they’ll be promoted in lockstep with the rest of their cohort, but tasks which actually require programming with magically route around them, and they’ll end up doing things like leading 6 hour planning meetings and producing spreadsheets. Lots and lots of spreadsheets.)

The company hereby promises the employee: Your company will provide structure and purpose for your life. You will be clothed in the company colors, literally and figuratively. You will be respected, inside and outside the company, as befits an employee of ours. You will be provided with benefits perfectly calibrated to allow you and your family to lead a middle-class Japanese life. Your children will go to as good schools as they test into. Your wife will be able to afford an annual trip to Hawaii with her girlfriends.

You probably won’t attend that trip because, as a salaryman, you wouldn’t want to leave your coworkers in the lurch by taking extended vacations. Your company officially allows you between 12 and 18 combined vacation/sick days a year, but salarymen generally try to hold themselves to about 5, taken in single-day increments. Your company loves you and wants you to be happy, though, so they’ll suggest two days for your honeymoon, two if a parent passes away, and one if your wife passes away. You can take that Saturday off, too, because the company is generous. There, that’s like four full days — five, if you time it with a public holiday.

There exist companies which don’t require their salarymen to work Saturdays. That is considered almost decadent for salarymen — the more typical schedules are either “2 Saturdays a month off” or “every Sunday off!” Even if you’re not required to work Saturdays, if one’s projects or the company’s situation requires you to work Saturdays, you work Saturdays. See also, Sundays.

Salarymen work large amounts of overtime, although much of it is for appearance’s sake rather than because it actually accomplishes more productive work. Depending on one’s company, this overtime may be compensated or “service overtime” — “service” in Japanese means “thrown in for free in the hopes of gaining one’s further custom”, so your favorite restaurant might throw in a “service” desert once in a while or you might do 8 hours of “service” overtime six nights a week for 15 years.

At those companies which actually pay for overtime (not uncommon, even for professional salaried employees, even for those who would characteristically be exempt in the US), there are generally multiple rates. I got time and a quarter between 6:30 and 9:30 AM, time and a half until midnight, and time and three quarters after 1:00 AM. That last bracket was there for a reason.

It is highly unlikely that anyone will ever tell you “We need you here until 3 AM. Yeah, sorry, tell you what, take off early at 9 PM tomorrow.” The company is just steeped in an environment which will make this decision seem like the most natural thing in the world to you. To leave early would let your team down. To make a habit of it would cause people to question your commitment to the company and to the important work that the company does. It will become so natural to work salaryman hours that you’ll teach their necessity to junior employees who you mentor, probably without you even realizing you’re doing it.

Don’t have a wife? You might quite reasonably think “I don’t have time to even think about that.” Don’t worry — the company will fix your social calendar for you. It is socially mandatory that your boss, in fulfillment of his duties to you, sees that you are set up with a young lady appropriate to your station. He is likely to attempt to do this first by matching you with a young lady in your office. There are, at all times, a number of unattached young ladies in your office. Most of them choose to quit right about when they get married or have children.

You might imagine that you heard a supervisor tell a young lady in the office “Hey, you’re 30 and aging out of the marriage market, plus I hear you’re dating someone who is not one of my employees, so you might want to think about moving on soon.”, but that would be radioactively illegal, since Japanese employment discrimination laws are approximately equivalent to those in the US. A first-rate Japanese company would certainly never do anything illegal, and a proper Japanese salaryman would never bring his company into disrepute by saying obviously untrue things like the company is systematically engaged in illegal practices. So your ears must be deceiving you. Pesky ears.

The company is your public life. Have an issue with your landlord? The company will handle it, in those cases where the company is not your landlord. (“So let me get this straight: we’re going to pay our employees, and then they’re going to immediately hand 25% of their salary over to an apartment? Doesn’t this suggest an obvious inefficiency? We could just buy a building and house dozens of employees there — lower transaction costs plus economies of scale.” Many Japanese companies have done this math already, and company dorms are quite common, particularly for young, single employees.)

Need to file paperwork with City Hall? Someone from HR can do it for you. Salarymen don’t file tax returns — the National Tax Agency and HR work out 100% of the paperwork on their behalves. Insurance? Handled. Pension? You’re sorted. Immigration, for those very rare salarymen who are also foreigners? Your CEO has written a letter to the Minister of Justice for inclusion with the paperwork that HR has put together, and you won’t even have to carry it into the office.

The company is your private life. All friends you’ve made since your school days almost by definition work for your company, because you spend substantially every waking hour officially at work or at quote leisure unquote with people from work. When you get off work rather early, like 7:30 PM, you’ll be strongly encouraged to go out to dinner and/or drinks with bosses, coworkers, and/or business acquaintances. (The company is buying, either directly via an expense account or indirectly via a “The most senior person pays and their salary has been precisely calibrated to accommodate this” cultural norm.) Like karaoke and golf? Wonderful, you’ll have an excellent time with the other salarymen, who have either perfected the skill of liking karaoke and golf or seeming to like karaoke and golf when invited out by colleagues.

We’ve mentioned that your company considers it its responsibility to see you appropriately married. That is not the sole way in which the company may try to arrange companionship, but let’s table that issue for the moment. When you get married, your boss will give the longest speech at your wedding, praising your diligence on that last project and bright future with the firm. Perhaps eight or so coworkers will show up. They’ll also take up a collection for you if a parent should pass away, come visit if you’re hospitalized, and offer to intercede if you should have trouble with your wife or children. You are, after all, one of the family.

Lifetime employment is somewhat on the outs in the last 20 years or so, but it is still a reasonably achievable thing in 2014, and an expectation that many Japanese folks quite literally structure their entire lives around. An offer of employment as a salaryman, while theoretically instantiated as a e.g. three year employment contract with “renewal upon mutual agreement”, is (practically speaking) a promise that one will be promoted on a defined schedule for one’s entire working career.

One’s actual salary as a salaryman is generally rather low — about $100 per year of age per month, as an engineer in Nagoya (set by a particular monopsonistic engineering employer near Nagoya). In Tokyo, my sense of the market is that, as an intermediate engineer in his early thirties, I’d probably command somewhere between $30k and $60k. (In Silicon Valley, the going rate would be somewhere between $120k and $160k and increasing rapidly.)

The stability is superior to even tenured professors or civil servants in the United States, though. Eliminating your position will result in, at worst, your transfer into a division optimized to shame you into quitting. Incompetence at one’s job bordering on criminal typically results in one’s next promotion being to a division which can’t impact shipping schedules and has few sharp objects lying around.

You owe your company one more thing: Don’t. Ever. Quit. Salarymen are very rarely hired mid-career — you start at a company directly after undergrad and stay there forever. If you somehow manage to separate from that company, you are damaged goods. You will, in all probability, never be offered a salaryman position again. You may be offered professional work as a contract employee, but this has worse material terms, second degree social status, and no job security.

You may think I’m exaggerating. Not so much. I spent about three years in the salt mines and could go on this topic for hours. You can also read about this, to exhaustion, in most books about modern Japanese culture. (Single favorite recommendation for foreigners: An Introduction To Japanese Society, Sugimoto. Salarymen rate only a chapter or two — the book is sweeping in breadth and does the best job I’ve ever seen at adequately representing the diversity of life here for a foreign audience.)

Salaryman loyalty compels me to mention that my company was scrupulously fair to me, in a fashion which is not automatic among Japanese megacorps with regards to their foreign employees. I am sincerely indebted to them for that.

Startups In Japan Are Considered Off-The-Charts Risky

As a young professional, you’re defined by your relationship with your employer, and everyone else expects to interface with your employer to do business with you. If your employer is yourself, or a company no one has heard of, this has numerous negative impacts on your life as compared to your employer being a member of the elite fraternity of Japanese megacorps.

Example: Housing. When I started my own company, I was living in an apartment that I had first rented as an employee of a megacorp. The entirety of the credit investigation was me presenting my business card to them. Possessing it implies both sterling moral character, stable finances, and a responsible party to intercede with should there ever be an issue with me as a tenant. (Japanese landlords and lenders will, as a matter of policy, escalate any disagreement with you to your boss, as the social opprobrium you’ll suffer will get you to quickly cave.)

The apartment required a guarantor (co-signer on the lease who is responsible for rent and damages if you fail to comply with your obligations), as many Japanese apartments do. Most young Japanese professionals use their parents. My parents were ineligible due to being, well, Americans living in America. I mentioned this fact at my office, whereupon my boss’ boss immediately said “Tanaka, he’s your subordinate. Take care of it.”, and my boss immediately called the landlord and said “This is Patrick’s superior at $COMPANY. We request that you send over Patrick’s guarantor paperwork. I assume that your company will find me acceptable as guarantor. Thank you in advance for your continued service to $COMPANY and our employees.”

When I quit my day job, I called the landlord to apprise them of this fact, as I was required to by the terms of the lease. At the time, I had somewhere north of $50k a year of income, and rent of $400 a month.

I was immediately asked to leave the apartment “at your first available convenience” because “self-employed” is about one half-step above “homeless vagabond” in terms of social esteem in Japan. No amount of explaining “I am not a risk of non-payment — I have lived here without incident for years and my income has increased as a result of quitting the day job” would mollify my landlord.

Want to buy a house? Japan theoretically has credit bureaus but credit scoring has not replaced manual underwriting to anywhere near the degree it has in the US, so you’ll find it very difficult to purchase a house without “stable employment”, by which we mean “being a salaryman.” (Or, equivalently for this purpose, a civil servant.)

Example: Relationships. Should you want to get married in Japan, you’ll find that most young ladies, and virtually all young ladies’ parents, prefer the material stability that comes from salarymen. My wife Ruriko was able to overlook my damaged professional prospects, despite the prevailing opinion among her friends being that I was unemployed. (The hypothesis was advanced, more than once, that as a foreigner who routinely travels abroad, speaks Spanish, and has money without any evidence of gainful employment, I was probably a drug dealer. I wish I were joking.)

When I met her mother for the first time, I brought my resume and tax returns. Her mother was not 100% keen on the match when we started dating, as a combination of “foreigner” and “not gainfully employed” suggested that I was not exactly marriage material, but I eventually won her over.

This is a real issue for many Japanese folks who want to become involved with startups, either as a founder or as an employee.

When I was spending my nights and weekends on Bingo Card Creator, my then-coworker (one of the two best engineers I’ve ever had the privilege of working with) built Github for SVN as a side project. He was hours away from launching it, then had one conversation with his wife about it. She was of the opinion that the side project might induce him to do something crazy, like leaving his job, or induce the company to do something relatively sane, like firing him for stealing company property (to whit, the brain cycles of a salaryman). That ended that.

One of the most common topics I have with young Japanese would-be entrepreneurs isn’t about how to get investment or how to find customers. Many of them want my advice on how to sell the idea to their parents or girlfriends. (Would-be entrepreneur ladies have a different set of challenges, but I run into them rather less frequently and they almost never ask me for dating advice.)

My general advice for Japanese folks trying to make their loved ones happy is “Tell them that, in tech, a lot of the companies you’d want to work for are full of inscrutable foreigners who have insane decision-making processes. Take Google, for example. Chock full of Americans. Man, Americans, right? Anyhow, Google has this crazy notion that you should demonstrate capability through personal projects prior to them hiring you. So really, the startup isn’t a startup, per se, it is an extended interview for the job at Google. After you get hired by Google, of course, you’ll be a salaryman at Google. Despite being chock full of Americans, Google gets salarymen: look how they exercise benign paternalistic control over every aspect of their employees’ lives. Almost as good as Sony, twice the pay!”

(Any Googlers reading this? Howdy! Don’t worry, as an ex-salaryman, I am absolutely sincere in saying that I understand the attraction and also understand why you might object to that phrasing. In my salaryman days, I would have objected to it, too. Seen in the clarity of hindsight, I plead temporary insanity exacerbated by extraordinarily effective social conditioning designed by very, very smart people. If you’re happy, though, good for you. I know genuinely happy salarymen, too, and wouldn’t think of attempting to stamp on their joy even though I have some very pointed observations to make about their organizational culture.)

Hiring In Japan Requires Exploiting Flaws In Salarymandom

In the US, startups have to come up with a reason for engineers to join them over AmaGooBookSoft. In Japan, the competition is the salaryman ecosystem, and it is a jealous god indeed, in that if you ever take a walk on the wild side you’ll never get back into respectable society again.

How to work around this? Well, you start by hiring around the edges for Japanese society. Most of my Japanese startup buddies are very good, by necessity, at hiring people who the job market has not valued appropriately yet. Since most highly-educated, career-oriented Japanese folks aspire to jobs as salarymen or similar work in the public sector, most Japanese startups have to hire folks who don’t fit that mold.

Some examples include:

Women: I may have mentioned alluded to the fact that traditionally managed Japanese companies are pathological with regards to their treatment of women. There’s an entire academic field devoted to that topic. Anyhow, this is an opportunity for startups here: since college-educated women are tremendously underused by the formal labor market, startups can attract them preferentially.

Foreigners: It is fairly difficult (not impossible, but difficult) for foreigners to arrange to get hired as salarymen. If you’re obviously foreign, no matter what you do, you’ll be constantly assumed to be an English teacher, since that is the one value-producing occupation that Japanese society conveniently slots you in. (Oh boy, does this get old.) Given limited ability to break into The System, startups are a fairly reasonable choice of occupation if you want to live in Japan for some reason.

”Misfits”[+]: Salarymandom isn’t all roses for Japanese men, either. Some don’t have the right degree. Some burned out. Some are unable to subordinate to the extent the jobs require. Some spent more than a few years abroad and are seen as being potentially “too foreign-ized to work in a Japanese company.” Some were simply born in the wrong year and thus in college during the wrong economy to get hired, which includes lots of young men in my generation. They are thus frozen out of salarymanhood, effectively for life.

([+] A Japanese hiring manager once told me, beaming, “I look for misfits.” I apologize in advance for the following sentence, but I will quote it accurately, because it is instructive: “Otaku, Koreans, foreigners, dropouts, I’ll hire anybody who can do the work. You’re bargains.” In an ideal world there would be no racists, but in the less than ideal world that you may find yourself living in, at least hope to run into ruthlessly capitalist racists, because that’s something you can work with.)

Good news for employers: Japanese employees are, comparatively speaking, cheap, and there is only a very small premium for engineers relative to similarly credentialed employees.

I heard a great line about this once, and unfortunately I cannot remember the source: “Most people want to become wealthy so they can consume social status. Japanese employers believe this is inefficient, and simply award social status directly.” The best employees aren’t compensated with large option grants or eye popping bonuses — they’re simply anointed as “princes”, given their pick of projects to work on, receive plum assignments, and get their status acknowledged (in ways great and small) by the other employees.

$30k is a reasonable wage for an engineer in Japan virtually anywhere but Tokyo. In Tokyo, average mid-career wages in engineering are roughly $50k (5 million yen a year). (Pay is generally higher in the financial industry and in foreign-owned corporations, which are generally in the financial industry.)

Non-salary costs of employment are roughly in-line with what they are in the US — budget about 25~50% extra. They include health insurance, pensions (defined-benefit pensions are compulsory but the required levels are rather low), and some I-can’t-believe-its-not-salary disbursements such as a commuting allowance, doesn’t-live-on-company-property allowance, has-wife-and-kids allowance, and what have you. Some of these are non-taxable, which means you should characterize as little money as “salary” and as much as those allowances as possible. Ask your accountant if you’re curious.

I’ve occasionally been asked “So what do you think of Japanese engineers?” In general, I think the field here is as wide as it is anywhere else. Two of the five most talented engineers I’ve ever had the privilege of working with — whom I’d stake against anyone in the Googleplex — are Japanese.

The larger hiring market includes, just like the US, many people who cannot be trusted to FizzBuzz. Young engineers are not, in traditionally managed Japanese organizations, given authority or responsibility, with the notion that from the time they’re hired to their early thirties they’re mostly just supposed to be learning the Proper Way Of Doing Things At Our Company, so expectations for productivity are very low. (I know some folks might find it difficult to reconcile “90 hour weeks” and “very low productivity.” Suffice it to say “Six hour planning meeting by five people to discuss whether the copy on a button should be ’Sign Up’ or ‘Sign Up For Newsletter.’”)

The state of the “modern web” in Japan

Complicating the issue for the purposes of startup hiring: Japanese engineers are largely employed by Japanese megacorps, and Japanese megacorps don’t really produce wonderful modern web software. Metropolitan Nagoya has literally thousands of people who can write assembly code that you’d literally trust your life to (you have before and will again, unless your sole method of transportation is bicycles), and probably only a few dozen who you’d want working on a web application. Tokyo has more, but still far too few.

In general, with exceptions, I’d rate Japan as about 5~10 years behind the skill curve relative to the US when it comes to web/mobile development. When I left my last day job in 2010, executing Javascript in the client side of a B2B application demonstrated very impressive technical acumen and my company was worried about losing their connection to spiffy, innovative American engineering techniques. No, not joking, really.

While raw programming ability might not be highly valued at many Japanese companies, and engineers are often not in positions of authority, there is nonetheless a commitment to excellence in the practice of engineering. I am an enormously better engineer for having had three years to learn under the more senior engineers at my former employer. We had binders upon binders full of checklists for doing things like e.g. server maintenance, and despite how chafing the process-for-the-sake-of-process sometimes felt, I stole much of it for running my own company. (For example, one simple rule is “One is not allowed to execute commands on production which one has not written into a procedural document, executed on the staging environment, and recorded the expected output of each command into the procedural document, with a defined fallback plan to terminate the procedure if the results of the command do not match expectations.” This feels crazy to a lot of engineers who think “I’ll just SSH in and fix that in a jiffy” and yet that level of care radically reduces the number of self-inflicted outages you’ll have.)

UX, web design, A/B testing, and the like are similar to programming in this respect. Best-in-class Japanese web applications produced in 2014 asymptotically approach Facebook 1.0 in functionality. One reason is that the primary B2C Internet consumption device is the cell phone and, prior to the iPhone arriving, most Japanese sites were designed with the “needs to be consumable on a feature phone” requirement firmly in mind.

The story of Japan’s relation to cell phones is very interesting. It is pithily summarized as “Japan managed to produce the Galapagos finches of feature phones — diverse, specialized to the native environment, found nowhere else in the world, and totally at the mercy of invasive species.” They were truly amazing hardware for the time with, like most Japanese hardware, all software re-written from scratch for every model, often in assembly. Given that those constraints make it pretty difficult to even ship a clock app, and most of the phones shipped with web browsers (!) and fairly functional Javascript interpreters (!!), they can be forgiven for having terrible UXes. And they were, until Steve Jobs changed that overnight.

Incidentally: when the iPhone came out, many foreign commentators said it would never be a hit in Japan because Japan doesn’t trust foreign products. That was horsepuckey when they said it — the iPod already had a 70%+ share while competing with Sony/etc on their home turf — and hopefully is even more obviously horsepuckey now.

Access To Capital

Japan is a rich country with almost unfathomable amounts of capital available to deploy. Japanese monetary policy has made money virtually free for more than 10 years now.

At the same time, Japanese startups have an extraordinarily difficult time raising capital.

How can both of these be true? Well, imagine a pre-YCombinator Silicon Valley with the strength of the social graph dialed to eleven. Japanese VC firms largely fund established entrepreneurs who might be called intrapreneurs: they put in twenty or thirty years of service with a particular company or group of companies, have an idea for a product that they can sell that company, raise investment from that company’s closely affiliated VC firms, and then may eventually be acquired by that company.

If you’re a 22 year old with a gleam in your eye, Japanese VC firms are not exactly rushing to make your acquaintance. Come back after you’ve got the deep network which will allow you to sell your solution into one of the megacorps. Yep, Catch 22.

Angel investors? For a variety of reasons, they’re thin on the ground here. Japanese tech companies have not yet started doing wide distribution of stock options like American tech companies do. When Google/Facebook/Groupon/etc IPOed, each of those events created hundreds to thousands of people who suddenly met the accredited investor standard, had a great deal of money to spend, and were interested in technology. By comparison, IPOs in Japan are exceptionally rare and the equity is typically centralized among investors and management. This results in relatively fewer people who can write $25k checks.

Angels in Silicon Valley have evolved a certain level of professionalization with regards to practices which is wildly not the case in the rest of the United States. These practices are actively promulgated by (de-facto) consumers of the angels’ services, such as YC and 500 Startups.

Japan is not quite there yet. If you were, hypothetically, to spend a few weeks pitching a promising startup to well-regarded angels in Silicon Valley, you would hear very few terms which shocked the conscience. If you were, hypothetically, to spend a few weeks pitching a promising startup in Tokyo… well, a plane ticket to San Francisco might be a very reasonable business expense, we’ll put it that way.

Valuations in Japan are, by Valley standards, absolutely ridiculously low. I am constrained here from giving you many anecdotes because that would be socially embarrassing for friends, so instead, can I tell you an anecdote from St. Louis? Slicehost was once told by an angel investor that the investor would co-sign a $250,000 loan in return for 10% of the company. This is after they had an enormously quickly growing hosting company. In Silicon Valley, this results in millions getting thrown at you at a valuation in the tens of millions. In Tokyo, the strangest thing about the Slicehost anecdote would be “Why’d they need $250k? Couldn’t they have gotten by with $200k? Man, St. Louis must be made out of money.”

Debt financing? Hah, you’re funny. If you’re attempting to open a hair salon, you can get, say, $0.8 million or so collateralized by the real estate, and use some portion of that for working capital. Software firms, on the other hand, are not ideally suited to the standards of underwriting departments here. (My bank, in consideration of my decade of patronage, spotless payment record, and outstanding character references, generously approved a $3,000 credit line for my business.)

Selling To Japanese Companies

Do you enjoy enterprise sales, but think it includes excessive focus on the product and not enough wining, dining, and corporate politics? Then does Japan have a deal for you.

Low-touch software sales is relatively popular in the US. (“Low-touch sales” is the Basecamp model, where a compelling website, free trial, onboarding experience, email marketing, etc generally sell prospects with only a minimum of personalized interaction with the company. “High-touch sales” is the Oracle model, where you spend a lot of time on individualized communication.) Many companies are quite successful at low-touch sales, and many more use the experience of having done low-touch sales successfully to start an enterprise sales operation.

The Japanese market virtually requires high-touch sales for selling software, including even low price-point software to SMBs. Decisions for small purchases for software (and a variety of other goods and services) are primarily made after face-to-face meetings with local sales reps. A great overview of the traditional process is here, and I cannot really elaborate on it more than “No, really, we really did have to take a distributor’s reps out to drinks to procure more MS Office licenses. No, really, the most formidable Japanese low-touch SaaS entrepreneur I know figured out how to sell SaaS door-to-door in Tokyo.”

The economics implied by this arrangement make Japan relatively more hospitable to enterprise software and relatively less hospitable to e.g. SMB software. (This is also a major reason why I, personally, don’t sell to the Japanese market. Given that I’m primarily limited by my own availability, selling to the US implies an order of magnitude or more more revenue per every hour invested.)

Maintaining a team of reps to do client visits (who can, quite literally, often drink their way through a $2k entertaining-prospects budget on a monthly basis… in a single evening if you don’t discourage that) costs quite a bit of money, but once you get into average contract values in the several hundred thousand to several million region (dollars), it works out to the ~20% that US enterprise sales operations expect, and the same factors that made adopting you difficult now makes it very difficult for competitors to steal your accounts.

Japan is a gigantic market for software, and the number two market worldwide for a lot of US firms. Prominent examples include Oracle, Salesforce, Microsoft (IIRC), etc etc.

Penetrating the Japanese market virtually requires either a local office (in Tokyo, because you’ll want to have in-person visits with your customers and, if they’re large Japanese corporations, odds are they are in Tokyo) or an arrangement with a Japanese distributor. In general, relationships between vendor, distributor, and ultimate customer can be fraught. If you’re coming to Japan, think long and hard about the distributor decision, as cutting them out of the loop is seen as unseemly behavior, but keeping them in the loop if they’re inefficient virtually dooms your chances here.

If you want to read more on this general subject, I recommend Venture Japan, whose take on sales operations here generally matches my experiences.

Do you want to sell Japanese companies consulting services, as opposed to products? Remember, you’re going to be compared with the price of domestic employees. They’re quite cheap, so you’re going to get quite a bit of price resistance.

The Personal Touch

Doing business with Japanese companies frequently resembles It’s A Wonderful Life. “Customer relationships” are not an empty phrase — many business relationships where one is approximately equivalent to a row in the database in the United States are, instead, expected to be relationships between two actual people.

This is occasionally exasperating, as a software person who doesn’t want to have to take someone drinking to sell a single SaaS account, but it is occasionally quite charming. Moving to Japan, particularly small-town Japan, was like visiting an old America that I had heard stories about but had never gotten the opportunity to experience.

For example, when I first came to Japan, I had no computer. I also had no money, because the plane ticket and setting up my household ate all of my savings. In America, this isn’t a barrier to getting a computer, because Dell will do a quick FICO score on you and then happily extend you $2,000 of trade credit.

Dell Japan, on the other hand, set me up with two phone calls with actual human underwriters at two Japanese financial institutions. Both had me fill out rather extensive forms (100+ questions — seriously). The first said “In view of your length of tenure at your employer and length of residence at your apartment, we don’t feel that your situation is stable enough to extend you credit.” The second said “Look, umm, officially, I am supposed to just tell you that we decline your business and wish you luck. Unofficially, the bank doesn’t extend foreigners credit, as a matter of policy. You’ll find that is quite common in Japan. I know, it is lamentable, but I figure that you’d be able to save yourself some time if you knew.”

So I gave up for a while, but mentioned to a coworker later that week that I really wanted a computer to be able to Skype home. He said “Come with me” and we left, in the middle of the work day, to visit a bank. It is a smaller regional bank in Gifu. I’ll elide naming it to avoid the following story being personally identifiable, but suffice it to say it is a very conservative institution.

My coworker got a credit card application and asked me to fill it in. I did so, but told him “Look, two Tokyo banks, which are presumably about as cosmopolitan as Japanese financial institutions get, just shot me down. One of them explicitly did so because I’m a foreigner. The chance of this middle-of-nowhere bank accepting a credit application is zero.”

“Don’t worry, I know the manager. Hey, Taro!”

Taro and my coworker had gone to school together.

“Patrick here just started working with us. He wants to buy a computer to call his parents, diligent son that he is, and needs a credit card to do it. Here’s his application. Make sure it doesn’t get lost in the shuffle, OK?”

Some weeks passed, and I assumed that I had been denied. Then there was a knock on my door early one Saturday morning.

It was bank manager Taro and an older gentleman who introduced himself as the Vice President for Risk Management of the bank. He promptly took over the conversation.

“You have to understand that we’re not one of those banks. We’re not some magical pot of money. Every yen we have is a farmer depositing against a bad harvest or a retiree’s pension, carefully husbanded over a lifetime. That is a sacred trust. We cannot lose their money. The bank has to be appropriately careful about who we lend that money to. Taro here tells me your trustworthy, so that is good. Even trustworthy young men sometimes make poor decisions. I need to know you won’t, so before I give this credit card, I have three questions for you.”

“Will you ever use this credit card to gamble?”

“No, sir.”

“Good. Will you ever use this credit card to buy alcohol?”

“No, sir.”

“Good. Will you ever give this credit card to a woman who is not your wife?”

That was the first of a dozen stories which you wouldn’t believe actually happened about that bank. Taro correctly intuited when I started dating a young lady, and when we broke up, solely based on on my spending habits. He considered that part and parcel with looking out for my financial interests.

Taro stopped me from doing a wire transfer back to Bank of America to pay my student loans during the Lehman shock because Wachovia had gone into FDIC receivership that morning. I told Taro that I didn’t have an account at Wachovia. Taro said that he was aware of that, but that I used Lloyds’ remittance service to send wires, and Lloyds’ intermediary bank in the US was Wachovia, which might or might not be safe to have money in at the moment. I asked Taro how in God’s name does a banker in Ogaki, Japan happen to know what intermediary banks Lloyds uses in North America off the top of his head, and Taro said, and I quote, “There exists a customer of the bank who habitually makes USD wire transfers using Lloyds and, accordingly, it is my business to know this.”

Taro called me on March 12th, the day after the Touhoku earthquake, to say that he was concerned about my balance in the circumstances (I had cleared out my account to pay a tax assessment minutes before the quake) and, if I needed it, to come down to the bank and, quote, we’ll take care of you and worry about the numbers some other time, endquote.

Taro eventually retired from his position, and as part of making his rounds, gave me a warm introduction to the new bank manager. He made it a point to invite me out for coffee, so that he’d be able to put a face to Taro’s copious handwritten notes about my character. Some years after that, a new manager transferred in. I popped by with a congratulations-on-the-new-job gift, mildly surprising the staff, but it felt appropriate.

When I moved to Tokyo, I went to the regional bank’s sole Tokyo office, which exists to serve their large megacorp customers. They were quite shocked that I had an account with the bank (“Mister! Citibank is down the street! If you use our ATMs you’ll get charged extra!”), and even more shocked when I told them that I run a multinational software company through it. “Wouldn’t you get better services with Citibank or Mitsubishi?” The thought of switching never crossed my mind. Indeed, I can’t imagine anything that would convince me to switch. They don’t make numbers big enough to compensate for how much I trust my bank.

Was I a particularly large account to the bank? Nope. It’s the same passbook savings account a 17 year old gets to deposit their first wages into. For 8+ of my ten years in Japan, my balance there was below $2,000.

The bank is one anecdote, but I could tell you about the hair stylist who drops me a handwritten postcard after every appointment, the restaurant that I went to weekly that tried to cater my wedding for free, the glasses shop which invited me to come back for a (free) frame re-bending and cup of coffee any time I was in the neighborhood, etc etc.

Japanese customers, in both B2C and B2B relationships, expect a level of personalized, attentive service which is qualitatively different than that in the United States. Anomalously good sales reps in the US are frequently operating at table stakes or below in Japan.

On the plus side, after you’ve actually won the business and demonstrated capability to serve customers to these standards, Japanese customers are very loyal. This is true both qualitatively and quantitatively. I’m aware of a Japanese SaaS app which, despite being sold at low price points on a low-touch month-to-month model (all predictive of relatively high churn rates) has a churn rate which would be considered exemplary for an enterprise SaaS app sold with high-touch sales on an annual contract.

The Mechanics Of Getting Started

Japan has a reputation as being forbiddingly bureaucratic. I find that this depends strongly on what exactly you’re doing. In many respects, the actual mechanics of starting a business are quite easy.

I quit job on March 31st, took April 1st off, and went down to town hall to file paperwork on April 2nd. As an American, I expect dealing with city government to be a very painful experience. I was whisked between three departments staffed by knowledgable, efficient, mostly pleasant bureaucrats, and in less than 30 minutes walked out the door with health insurance, a public pension, and forms filed to reflect that I’d be filing as a self-employed person for taxes the following year.

Historically, Japan makes company formation rather more difficult than it is in the US — it costs a few thousand dollars (filing fees and legal advice, which you’ll need to complete the process) and requires that you have $30,000 of capital. This has changed a bit over the years, in response to feedback from Japanese entrepreneurs. Personally, though, having a supermajority of my customers be in the US makes having US entities equally useful as Japanese ones, so I just have US LLCs, which you can open with ~$500 and 30 minutes. (Japan’s closest equivalent is a “goudou kaisha”, which are substantially easier and less costly to form than traditional corporations. However, many Japanese entrepreneurs choose to go for the traditional corporation anyway, on the theory that it is likely to be perceived as more trustworthy.)

I’d estimate that I spend approximately 3~5 work days a year dealing with government requirements. In my business, the overwhelming majority of this time is spent on doing taxes. They’re approximately as burdensome as American taxes at my scale of business. One added hurdle: Japanese accountants are typically not conversant about the software industry and, since the intersection of Japanese tax law and software realities is not well settled, are often not tremendously capable of giving great advice about it.

Where does it get more difficult? As you get progressively more enmeshed with the Japanese bureaucratic state, the amount of time you’ll spend managing that relationship goes up rather drastically. Assuming you’re not in a regulated industry, like e.g. finance or healthcare, the thing which is most likely to bring you to government attention is hiring full-time employees. (If you’re in a highly regulated industry, may God have mercy on your soul — ask your competent legal advisors rather than me.)

Remember how societally important the employment relationship is? The Japanese government will expect you to discharge your responsibilities in that relationship, and this will generate enormous volumes of paperwork. Most of it is similar in character to running a business anywhere, but there is a lot of it. The government is impressively well-organized, but it is well-organized to accept your paper declarations in-person, and you’ll spend a lot of time acting as a transport layer for SQL queries between government offices.

I once was obligated to spend $2 to get a piece of paper telling Agency B that a particular number in Agency A’s possession was, in fact, accurately reflected on the paperwork I had earlier presented to Agency B. Agency A and B simply will not talk to each other about this. They have a protocol, and you need to walk the messages of that protocol between each of them, until they tell you you’re done. Usually, A and B are reasonably close to each other, so you’ll waste a minimum of travel time.

Japanese folks consider at-will employment to be an alien institution, much like you might be thinking about the salaryman system. (At-will employment is the common-in-many-US-states arrangement where employers and employees have the mutual right to terminate employment for virtually any reason.) If you hire full-time employees in Japan, you can only dismiss for cause, and the bar is relatively high.

Imagine having the following conversation with the relevant authority: “Incompetence at one’s job is only a reasonable cause for termination if you’ve dutifully discharged your duty to retrain the employee, documented several months of poor performance subsequent to the retraining, and explored options for other jobs they could do for you. After all, everyone starts out at incompetent, right? If we let any company just up and fire anyone merely for not being able to do their job, that would contravene the social purpose of employment.”

As you can imagine, this makes hiring for small companies even more difficult than it already as.

If one wants to terminate an employee for poor performance in Japan, the most efficient way is dealing with them like an unwanted New York or San Francisco tenant: offer to buy them out. If they don’t take the buyout and don’t wish to leave, your escalation options are limited and fairly high-stress.

Availability Of Non-Employee Business Inputs

Forgive me for stating the obvious, but people do ask, so: Japan is a highly developed industrialized nation where any business input you require is available, in quantity, if you’re prepared to pay for it.

Office real estate, particularly highly desirable office real estate in Tokyo, is more expensive than you might expect and modestly difficult to acquire. This is largely because, as a startup which is considered off-the-scale risky, you’re not a good candidate for a lease.

That said, if you’re willing to look around a bit, walk an extra 10 minutes from the closest train station, and go to a slightly less prestigious address, you can reasonably get a startup-capable office for $2,000 to $3,000 a month. A floater spot at a coworking spot in Tokyo runs about $300 to $400 a month. If you simply need a place to park your weary bones, Internet cafes are ubiquitous and charge about $4 an hour, although they’re typically not great environments to work from.

Internet connectivity to your office, place of residence, and phone is fast and cheap. Gigabit Internet runs about $50 or so a month and a generous data plan for an iPhone is about $50 to $100 a month. Internet connectivity in public spaces like e.g. (regular) cafes is much, much rarer than it is in the United States, although this is changing.

Do You Speak Japanese?

I’ve never had the experience of running a business in Japan without speaking Japanese. Doing so strikes me as playing life on hard mode. Japan theoretically has compulsory English education but, practically speaking, Japanese folks who can carry on a business-level conversation in English are rather thin on the ground.

This is true even in engineering. I know, I know, most technical documentation in software exists in English, and many foreign engineers are amazed that people who don’t possess a firm command of English can nonetheless be great engineers. All I can say is you’d be surprised by how many levels of fluency there are.

Although it is changing gradually, routine business dealings are generally conducted only in Japanese. Some businesses or government offices might have forms which are bilingual, but you’d be unwise to expect an answer to any question about the form.

Learning to speak, read, and write Japanese is enormously fun. So is starting a company. I recommend not combining the two. It typically takes at least two years of high-intensity study to be able to carry on a basic business conversation in Japanese (on the level of “Are you done with that? Not yet? Why not, and when do you expect to be done?”) and, unless you’re already coming from literate in Chinese, four-plus years until you’d have pretty good odds of understanding consequential business documents like e.g. a lease or contract.

Immigration

You can skip this if you’re Japanese.

Japan has a variety of categories of status of residence, which is a status quite similar to what the rest of the world calls visas. (A visa only lets you into the country here, but a status of residence allows you to stay and gives you privileges you might want during your stay, such as the privilege to work without being deported.)

Applications for most professional statuses of residence, such as engineer or humanities specialist, require sponsorship by a Japan-based organization. One’s likelihood of being approved depends in a fairly direct fashion on how much societal pull that organization has. If Toyota wants you to get a status of residence, you will be issued a status of residence. It gets somewhat more dicey with smaller companies, and the standard of review for documentation gets rather higher.

Status of residences follow employees, not jobs. If you are, for example, an engineer, you can quit your job as an engineer and get any other job without requiring a review of your immigration status… as long as that new job is in the same status of residence. This is very important.

The most common way to licitly start a business in Japan as a foreigner is to arrange to work with a Japan-based employer, get one’s status of residence through the employer, work for a time, quit, and then go into business for oneself in the same field. Although it isn’t exactly encouraged, the regulations for e.g. engineers don’t disallow you from being an engineer for a variety of customers including e.g. an entity you just happen to own. This means that you have from the time you quit to your next renewal of your status of residence to figure out how to either e.g. justify an entrepreneurship status of residence or fulfill the three prongs of your existing professional status of residence. (“Continued stable employment, at a Japanese organization, as demonstrated by contracts.”)

My hack around this, after quitting the day job, was to describe myself as an engineering consultant. I presented the immigration office with a stack of invoices and tax returns demonstrating that I made a stable living in software. (Much of it was from selling software, the key bit from their perspective was that at least one of my contracts had a Japanese company as a party to it.) After a bit of wrangling, they approved me to continue doing what I was already doing. (Word to the wise: this trick for self-sponsorship doesn’t technically speaking allow one to “run a company”, so I would avoid doing things which make it undeniable that one is in fact doing that, like e.g. hiring full-time Japanese employees.)

There exists a new status of residence for highly-skilled professionals which may make this somewhat easier than the business manager status of residence (which is achievable but has toothy requirements, like having 2+ full-time Japanese employees and at least ~$500k in capital).

Dealing with Immigration is, always and everywhere, high stress for immigrants. On the plus side, highly-educated Westerners are not the primary focus of xenophobia in the immigration agency. (Did I say xenophobia? Wait, sorry, I meant to say “zealous attention to their statutory duty to ‘forcibly expel undesirable foreigners from the nation.’”)

Permanent residence is an option, theoretically after 10 years of residence in Japan but, practically speaking, only about five if you’re married to a Japanese person. You’ll need to make a showing that your presence in Japan redounds to the benefit of Japanese society. It would be easier to do this if you were a salaryman, but successful entrepreneurs can also, in principle, pass the bar, depending on the mood of the examining clerk.

On Being A Foreigner In Japan

I customarily start speeches in the US with a fish-out-of-water story from over here, because they’re often funny. Some were less funny when I lived them, believe me.

Japan has a reputation for xenophobia. This is partially unfair: it is a large nation with more than 100 million people, who are not unanimous about anything which humans are not in general unanimous about. Many Japanese folks like foreigners, many more are indifferent, and attitudes in even less-enlightened portions of the country perceptibly improved in the 10 years I’ve been here.

That said: is racism a bigger problem in Japan than e.g. in the United States? Oh, yes. Unquestionably.

Let’s say you’re building a job-hunting site in the US and you notice, in the documentation, a boolean flag on the JobListing object titled nonWhitesAllowedToApply. It being 2014, several decades after relevant legislation has been passed, and you being at a Fortune 500 company which does not have a reputation as committing itself to clearly illegal courses of action, you might ask your boss “Hey boss, that nonWhitesAllowedToApply flag? Ahem, what the hell?”

You know what would not happen? Your boss telling you “Yeah, umm, I see how that could potentially be problematic, but the customer wanted it.”

Not that any Japanese company has ever instructed an employee to implement nonWhitesAllowedToApply, mind you. That would be silly.

Similarly, it is illegal in Japan to discriminate on the basis of race in e.g. housing. This bounced me out of approximately 40% of available apartments in Ogaki and a non-zero number in Tokyo, though I think I could have probably pulled strings around it. (In general, foreigners are foreigners in Japan, but certain foreigners are less foreign than others. Highly-paid well-educated articulate Western men with deep Japanese social networks are almost Japanese for the purposes of avoiding institutionalized discrimination like that. Almost.)

In general, I counsel picking one’s battles carefully with regards to this sort of thing. The formal channels for resolution are very slow, and you can quite easily win the battle (vindicated by the local equal opportunity commission; collect damages in the amount of a month’s salary) and lose the war (unable to work again in this country). I generally avoid it by picking associates carefully. This works in the 99.8% of time when I can pick who I deal with. (Sadly, while you can pick your bosses and landlords, police/immigration get to pick their foreigners, whether the foreigners like it or not.)

While not as consequential as discrimination which has actual professional/housing/etc impacts, Japan can occasionally be maddening with regards to certain expectations about foreigners. One of them is a widespread belief that foreigners don’t speak or read Japanese.

Imagine the following dialogue.

Me: “Good morning.”

Clerk at ward office: “WOW YOU SPEAK JAPANESE SO WELL.”

Me (ritual reply for compliment): “You are entirely too kind.”

Clerk: “So can you write Japanese, too?!”

Me: “I’m literate.”

Clerk: “So you could write, like, the name of this office?”

Me: “Yes. The hardest character in it is taught in third grade.”

Clerk: “Wow that is so amazing! I don’t think I’ve ever met a foreigner who could write Japanese.”

Me: “That’s funny. I don’t think I’ve ever met a Japanese person who has never met a foreigner who could not read Japanese. Except for three other clerks at this office this morning. And the last 2,000 times this happened.”

I did not say that final line because one does not go out of one’s way to antagonize people who are fundamentally of good will and also in a position of authority over one’s ability to continue living in one’s neighborhood. But believe me, I’ve wanted to say it about 2,000 times.

Imagine walking the tax return for your multinational software company into the local tax office and being asked, in a clerk’s best speaking-to-a-slow-child voice, “Who can I call mimes phone if I have a question shrugs about this paper points?”

“My name and contact information should be printed in the responsible corporate officer box, as per the usual.”

“But tax words are hard!”

“‘Straight-line calculation method for depreciation of an intellectual property asset’ was a really corker, I agree, but luckily your pamphlet ‘Easy-Peasy Taxes For The Self-Employed’ helpfully defines it on page 47. I’ll do my level best to comply with all of my requirements under the law, including looking up jargon in the dictionary, when necessary.”

It is occasionally to one’s advantage in business dealings to be a foreigner, largely because you can selectively code-switch between societal expectations for Japanese people and societal expectations for foreigners. I try to avoid abusing this, but it has occasionally been useful to e.g. object vociferously to something while pretending to be unaware that one is causing a scene.

Few things in life are worth fighting over. Fights that are worth fighting are usually worth winning.

Are Any Businesses Uniquely Helped Out By Being In Japan?

I very rarely feel like my professional opportunities are greatly circumscribed by being in Japan. Now is a wonderful time to be alive, and a combination of the Internet, a worldwide community of practice, and phones/plane flights mean that my business is virtually as viable in Tokyo as it would be in Toledo.

That said, candidly, my particular business does not benefit much from being here. (It would operate equally well from any reasonably fast Wifi, and since most of the customers are in the US, being closer to US time zones would mean a few less late nights for me.)

If you do sell to Japanese customers, it is obviously to your advantage to be here. Would I recommend that, given you have a choice to site your business anywhere in the world? Well, if you understand that your primary business challenge is going to be in sales, and that sounds like a good fit for your skill set and ambitions, Japan is a reasonably good place.

The market is tremendously underserved here with regards to technology solutions, in virtually everything relevant to you if you’re reading this. UX and design which Silicon Valley companies would consider barely adequate for an internal admin app would strike Japanese customers like wizardry from the future.

Competition from other startups is rather low, and Japanese megacorps do not exactly have Internet DNA yet, which means that distribution channels which are extraordinarily competitive in the US (like, say, AdWords or SEO) are not nearly as competitive here.

Market-leading foreign companies often neglect their Japanese operations, allowing “Like $NAME_A_STARTUP, but natively Japanese” to be a perfectly adequate strategy. Yes, you’re locked onto a “small island nation”, but it is a small island nation of 130 million globally rich people. (Dave McClure once said, with regards to Japanese startups, that they’re far too eager to exit the Japanese market and go multinational. I tend to agree with this assessment. The market here is gigantic and the competition usually sucks. I think that most Japanese entrepreneurs just want to broaden from the Japanese market quickly in the hopes that they’ll land somewhere which celebrates entrepreneurship.)

I’m optimistic in the longer term about the Japanese startup community specifically and, though this might be controversial here, the Japanese economy generally.

Recently, there has been a modest bit of interest by Valley investors in Japanese startups. I’m aware of YC and 500 Startups being active here, and some of the best Japan-based entrepreneurs I know have substantial cross-Pacific ties. (One plug: Jay Winder, CEO of MakeLeaps, which is Freshbooks except for Japan, is presently in San Francisco. If you are, too, you should strongly consider taking him out for coffee. He’s the most formidable CEO I’ve ever met.)

Should any of the rest of you be interested in starting a business in Japan, investing here, or what have you, please drop me a line. I’m always happy to help. Similarly, if you’re ever in Tokyo, I’d be happy to say hiya.

もちろん、日本の方にも役に立てるなら、ご連絡ください。

About Author

Patrick McKenzie (patio11) ran four small software businesses. He writes about software, marketing,
sales, and general business topics. Opinions here are his own.

Samuel Hulick, one of the guys I trust most with regards to SaaS user onboarding, joined us for this episode of the podcast. I met Sam first when he was writing a book on the topic. The best evidence I can give you for the proposition “Sam knows more than the vast majority of people about user onboarding experiences” is the fact that he’s written up 25+ of them publicly (e.g. Basecamp’s) and that the writeups are of very high caliber. Check them out sometime.

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I’m Patrick McKenzie, perhaps better known as patio11 on the Internet. Back in 2006 I created a side project selling software. This eventually morphed into something a little more. Since 2010, running this software business has been my full-time gig.

Who am I?

My name is Patrick McKenzie (better known as patio11 on the Internets.)